Premiums may be high, but there is a reason for it

One monoline lender has come to the defense of both lenders and mortgage default insurers by commenting on how risk is assessed.

“Seems every time I read this forum the most lively debate is centred around the joust and pare of risk,” one lender who chose to remain nameless wrote on MortgageBrokerNews.ca. “That is, that some believe lenders, [mortgage default insurers], investors et al have a flaccid approach to risk. I won't comment on the calculations in some of the posts; only to say they are highly simplified: here are a couple of additional perspectives as to why premiums are higher with no simple line to loss.”

According to the lender, the government is “sincerely” concerned about the level of indebtedness and the ever-increasing housing prices, and underwriters are listening.

“The tone of some of this would be substantially different if all the participants who demand more risk be taken by others, participated to any degree in the assumption of any of that risk,” the lender wrote.

The lender’s comments were spawned by one broker questioning insurance premiums.

“This brings up a point that has often caused me to question why the insurance premiums are as high as they are; if only three or four or five per cent of all the deals go into default… why the big premium?” Rick Robertson of Mortgage Mentor wrote on MortgageBrokerNews.ca.

Of course, as one broker pointed out, premiums aren’t determined by current default levels – underwriters have to account for the peaks and valleys of volatile financial systems.

“Insurance is cyclical: sometimes a decade or two goes by with normal losses, then all hell breaks loose and huge losses eat into capital reserves,” Ron Butler of Verico Butler wrote. “We have had mortgage insurance companies go bankrupt in this country before so there is no sense in suggesting that the mortgage insurers are an eternal profit printing press.”

Isn't it something like .1% of mortgages default? I think increasing the insurance premium for 5% down payment is silly. All it does is limit the financial advancement of first time home buyers because they end up with no equity in their home. It'd be great to see taxation on foreign investors. Most are buying cash or with very large down payments. They can afford to be charged a few extra fees.

Omer Quennevilleon
2015-06-04 9:41:39 AM

Insurance is no longer useful, it has become mainstream and a money maker for the insurance companies. It needs to be revamped for the original purpose it was intended. "We" either help people get the security of a home behind them or we pay to take care of them later.

LanceHon
2015-06-04 9:44:46 AM

Rick's numbers are off, as the default rate is more like .5 of 1%, which makes his argument stronger. I think some of it simply has to do with appeasing detractors, as double the required reserves seems insufficient for them, maybe triple will quiet them down? Of course, if one wanted to be sinister, one could say the Gov is behind it to simply get more annual dollars out of it to balance their books, or to maintain the current profit flow despite reducing it's presence, or more cynical is the Gov wants to boost profits before selling it? There's actually a number of possibilities. Let's see if their reserves go up, or if the Gov pockets the money, that might give us a hint.

George Christopouloson
2015-06-04 9:55:54 AM

One of the concerns the BoC has is that there has not been correction in almost a generation. Make no mistake, nothing is forever. A few of us older guys remember the late '80s and early '90s.It was not that long ago the Genworth was in serious trouble covering all the claims.Did you ever wonder why the bulk of insurance coverage went to CMHC?

Omer Quennevilleon
2015-06-04 10:19:21 AM

They also have a generation of proceeds from this insurance. It should be in a fund and ready to go... but hey, lets "vote for change" and re-elect the same idiots again.

mono line lenderon
2015-06-04 11:29:33 AM

Insurance is no longer useful? Really? We must look just beyond the determination of Canadians to own homes as just that, an aspiration. It is not a right and it's certainly not a burden that should require an entity private or public to take undue risk. Or the tax payer or the investor. Given that MBS investments, bonds and the like are popular with Canadians; ask them how they'd like more risk with less return. Call your uncle Joe in Florida and ask him how his 401k with MBS instruments in it is doing. Big picture here guys. The ground under our feet is shifting. There's more to this than just "helping to house Canadians". The low default rate is down to two factors, extraordinary realty values and extraordinarily low rates. The latter highly influences the former. When the market corrects or just cools and rates move things will be different. Let's pray it doesn't rain but be glad we have our umbrella.

Omer Quennevilleon
2015-06-04 11:37:01 AM

I usually don't respond to those that use an alias. When it rains it poor's, watch what happens to your umbrella.

Steveon
2015-06-04 11:58:05 AM

Premiums get charged because cash accumulations get eroded by government money grabs, shareholder dividends etc. If these insurance groups were handled like coops, where all members benefited from the cash accumulations, then I would agree we have a good measure for creating rate... but, when the insurance companies pay dividends and then say they are "broke" when trouble happens, I have a tough time crying for them.

Ron Butleron
2015-06-04 1:03:57 PM

There are always some spectacularly dumb posts on these blogs. Let me make this clear: it has been over 2 decades since it happened but a mortgage insurer in this country went BROKE because claims overwhelmed them. They were not bad underwriters but the housing market turned in a big way and they were toast so all this silliness about co-ops and umbrellas and government money grabs, please just stop. These insurers are businesses that can make money or lose money, just because it may take 25 years before they start to lose does not mean that it will not happen.

LanceHon
2015-06-04 1:15:25 PM

Gov money grabs is dumb Ron???

Omer Quennevilleon
2015-06-04 1:20:17 PM

Actually, they didn't go broke, they jumped ship. And if the government invest those fees over the past two decades, we would have nothing to worry about when the bail out comes. Instead, "we" pay the insurance and then we pay again should the market turn in a "big way". The point of a government run program is to protect the people anything less in this situation is a money grab. Nothing wrong with having an opinion here, that's what this forum is about. If we were all right, a forum would be useless. The only silliness here are those that use bogus names.

Ron Butleron
2015-06-04 1:23:46 PM

It is dumb when two of the companies are private companies, two out of the three. CMHC is it's own ballgame but they definitely can have losses at CMHC if the market turns big time. Government money grab is a dumb comment because if the feds did not sponsor home ownership through CMHC and backstop the other two entities home ownership in this country whole be a whole lot more expensive and a lot worse.

LanceHon
2015-06-04 1:26:49 PM

Ah yes, agreed

Omer Quennevilleon
2015-06-04 1:39:39 PM

Actually, that's not correct. Plenty of markets around the world operate without CMHC type insurance and those markets are as solid or more so. CMHC was intended to help first time buyers into the market and to secure the loan. Similar to Unemployment insurance. It was suppose to support itself. Because the revenue from CMHC goes into general funds certainly does make it a money grab. They shouldn't call it insurance, they should call it a tax which is what it has become.

Steveon
2015-06-04 1:41:02 PM

lol, Government took $800,000,000 out of CMHC last year... taxes on profit. So if the market changes and the profit disappears will the government give the money back?What exactly is "profit" in the insurance industry IF like you say, every 25 yrs there is a disaster.My concern is that CMHC was set up to help people who needed help. NOW, CMHC charges people who need help more money and rich people pay less.I have frustration that the model, set up with a goal to help people has turned into a true insurance company interested in risk.If the extra premium didn't turn into more government taxes then I would agree that the premium contributed to risk aversion, but I can see money headed straight into taxes. How much of the new premiums actually sticks with CMHC and how much leaves to pay taxes?

Ron Butleron
2015-06-04 1:51:40 PM

Omer, very few countries in the world have our level of homeownership I think we are in the top 2 or 3 in the world: high 60s% to low 70s%. Canadians also enjoy some of the lowest mortgage interest rates on Earth. It beats the hell out of me why their is so much bitching about such a successful system.

Ron Butleron
2015-06-04 2:04:43 PM

Steve, for heavens sake, the reason a crown corporation exists is to return excess profit to the government. Guess what, if there are losses the government has to make good on those losses. It beats me why this is so hard to understand. If you want to say the premiums are too high, okay, fine, separate argument for another day but "rich people pay less" sorry, no, if you have 20% down you pay zero and I have tons of clients on very modest incomes who saved and scrimped and bought the house that was affordable at 20% down and I have clients whose parents gave them the money as a gift. So "no" its not the rich getting richer that's just blather.

mono line lenderon
2015-06-04 2:41:32 PM

Not an alias Omer. I am mono line lender. My parents had a sense of humor when they named me. But I suppose they could have gone with something cooler like I'm Batman. Seriously, I use a nom de plume because in this forum I speak for myself, and do not necessarily express the views of my. I thought the idea here was about the free exchange of ideas and experience. Yours and mine. I've learned stuff in this forum from the broker community over the years and apply much of that to my practice. I don't believe I've disagreed with anyone's commentary herein I just believe there's more to it. As far as when it "pours" I believe that liquid MIs will be critical. When it does pour and the MIs haven't provisioned for that rainy day, today's policies will seem positively "gunslinger" by comparison.

Steveon
2015-06-04 3:18:34 PM

you said prepare for 25 yr storm in one statement and excess profit in another. I typed the search words CMHC and "cashcow" into google and it would seem, there is an impression, that risk preparation results in alot excess profits, which could make a person argue that CMHC is not as inclined to risk management as proposed.As for poor people with 20% down, I will save further comment for an article about that topic.

Ryanon
2015-06-04 4:39:37 PM

Let's be honest, if the government thinks they can get away with charging more for 95% LTV deals then they will do it (and they did). It may be a subtle (or not so subtle) way of forcing home buyers to put more down so that it in turn reduces CMHC's risk to a downturn or stagnant housing market in the future. The alternatives could be worse for the industry (10% down minimum).

Omer Quennevilleon
2015-06-04 6:28:54 PM

Where I come from the minimum down is 35% and it seems to work fine. You need to do more research, in some countries home ownership is a right.. I don't want to quote what I don't know but I do know we are one of the few countries the pay tax, on tax on tax under various names. The key word to remember about CMHC is "insurance". It is no longer insurance it is a tax grab.

Ron Butleron
2015-06-04 6:42:20 PM

Omer, minimum 35% down is just plain nuts in a country where the average house price is over $480K. Really, if this forum is going to be anything near professional we need to use common sense in these posts and quit posting abject foolishness.

Omer Quennevilleon
2015-06-04 8:22:35 PM

You need to take your time and read. I said "where I come from" (Hong Kong) 35% is required and I can tell you the average price is a heck of a lot higher than 480k. If anyone here is behaving like a fool, its you. Take your time and read before you speak. You are making us all look like fools with your comments.

Ron Butleron
2015-06-04 8:35:11 PM

Omer, Hong Kong........... Hong Kong?? you want to compare housing policy in a single city to the second largest country by land mass on Earth. Seriously, you have to be kidding right? It some kind of joke isn't it? It must be.

Ron Butleron
2015-06-04 8:38:03 PM

Omer, I took the time to look you up, you're actually a realtor who plays at mortgage brokerage. It explains everything,

DeJongon
2015-06-04 10:14:42 PM

Omer,

STFU....you're embarrassing yourself.

Sincerely,The rest of the forum

Omer Quennevilleon
2015-06-04 11:56:23 PM

You're the embarrassment Butler. If we're all idiots and your not, that makes you the odd ball.

Jesse Don
2015-06-05 8:48:47 AM

I think a few people on this one made themselves look foolish. Adding an opinion is fine but should not be cutting each other up. This isn't high school. One good thing that came from this forum is a few good comments among the stupid ones. Nothing we say or do will stop the government from messing with mortgages and making our jobs a little more difficult in doing so. We just have to ensure we're prepared for when the next change happens and adjust without crying about it.

Omer Quennevilleon
2015-06-05 9:49:17 AM

LOL @Jesse... I agree Jesse... I don't usually stoop so low and I will own that for sure. I'm surprised they don't have a monitor on this site and kicked us off.